Hope someone can help, I have done nothing but ER for the last couple of years. So i have a interview with a shop that invests across who capital structure. THe interview they give you a recent credit offering and tell you to give them a recommendation. Also this company is currently private. So my usual process of pulling down reserach notes/models on the company from Reuters knowledge is not available. Can someone give me some pointers on how to start thinking about one of these debt offerings?
the first thing that pops into my mind is publicly traded comps but I’m sure you thought of that?
^ yep. Gives me some info on industry and some prespective of the company’s position in it. But still know idea on the Catalyst/drivers of the company.
I would definitely agree with buddha that you would want to check out the industry and where the company fits in with it and compared to other publicly traded companies in the sector. There’s a lot more you can do with a private company though. First, I would say to check SEC Edgar and see if the company ever was publicly traded. Old 10-Qs or Ks might give an indication to some tangible information. I would try to learn as much as you could about the industry or company based on available information and come up with a couple of questions that you would like answered. Maybe not quant information, but more general stuff. Then, I would follow the line of Peter Lynch or Fisher and try to call up the company and get somebody on the phone there and ask them. Lynch used to call up and say he was a private investor holding 10,000 shares (even if he held 0) to try to encourage IR to talk to him. Since it is private, you might need to come up with some other believable story (“I work for a private investor who holds some of their bonds?”) Even if the equity is private, that doesn’t mean you can’t get information about the bonds. I would try to find a Bloomberg and look up the other debt the company holds. You might need to read some bond prospectuses to try to find some information about the company’s financial situation and how much debt they have. You might also try to track down any information you can about the rating itself including what the firm said (in their words) when they changed the rating.
to help clarify why i have so much trouble with this let me preface with how i normally look at a company. 1.) check starmine to see who the better analyst on the name are (assuming it’s a new space) 2.) Pull most recent 3 month research and any intiation reports within the last year if avaiable. 3.) have sell-side associate send me their working models 4.) build my own model 5.) Search Gartner for info regarding the industry 6.) Read last 10ks or Qs 7.) Listen to last couple of earnings calls 8.) use all info to input reseanable estimates to get sales and margin numbers. 9.) Circle back with SS analyst to get a feel if my estimates make sense 10.) Revise model if necesary 11.) Writeup and present If you will note with a debt from a private company, just about none of the steps of my usual procedure apply. Can someone who works in High Yield give me a quick rundown of what he/she usually does when picking up a new name?
buddha, why the switch to high yield?
The company is private, but are the bonds registered ( as opposed to a private placement)? If registered, you will have access to their filings via the sec website. I would bet that they are if your potential employer assigned this project looking for you to complete it on your own. If the bonds are not registered, there is really nothing you can do.
negativefcf Wrote: ------------------------------------------------------- > buddha, why the switch to high yield? it would be going form top 15 firm to top 3 firm. Better role, and more pay. Better city. And I’m young so I want to experience different types of jobs across the capital structure to get a better understanding of the big picture. Not even sure i would go through with it though…
If you tell me the company I can pull the financials for you, even if they’re private (I have access to all offerings via a couple of websites). Hell, if you write me a nice email I might even do the write-up for you. firstname.lastname@example.org
aic Wrote: ------------------------------------------------------- > The company is private, but are the bonds > registered ( as opposed to a private placement)? > If registered, you will have access to their > filings via the sec website. I would bet that > they are if your potential employer assigned this > project looking for you to complete it on your > own. If the bonds are not registered, there is > really nothing you can do. yes they are registered and i do have filings, and management discussions. But hard to really give earnings projections going forward without the sellside to talk to (guess i’m spoiled from always being able to). With out doing so, hard for me to get a feel of their CF and BS sheet in the out years, and consequently having a bit of trouble coming up with a convincing recommendation.
buddha Wrote: ------------------------------------------------------- > 5.) Search Gartner for info regarding the industry > What’s Gartner?
i_suck Wrote: ------------------------------------------------------- > buddha Wrote: > -------------------------------------------------- > ----- > > 5.) Search Gartner for info regarding the > industry > > > > > What’s Gartner? Gartner and IDC are to major data source (especially for tech) anyways, they have things like PC demand, growth estimates, market share data, and a billion other interesting pieces of data. Basically if you ever read the sell side initiation reports, take a look at their graphs on the industry it will usually say source: Gartner or IDC
I admittedly have minimal equity analysis experience but to me the fundamental difference between HY research and equity research is why you are investing. The goal of debt investing is to be rapaid with a return. Earnings growth drives stock prices. I would start any HY analysis with a liquidation analysis. There’s a reason some industries are HY friendly, they usually have strong asset profiles. In addition, any recent offering should have an adjusted EBITDA number which the offering is being marketed off of. You may want to determine what adjustments have been made to reach this adjusted EBITDA number and alter accordingly. You then want to analyze the strengths and weakeness at each level of the capital structure. This shoudl include looking at corporate org. structure to determine which debt is at ehat entity. To get an idea, look at the SEC flings of Qwest or Intelsat. These are companies with complex org. strucutures and several layers of debt at various entities. The purpose of this is you want to determine whther debt is located at a holding company or an operating company. Holdco’s usually only hold equity interests as assets while opco have hard assets and would therefore be repaid first in the event of a bankruptcy. If there are multiple entities, check if any entities guarantee the debt of other entities. Guarantees can flow upstream and down. If a holdco doesn’t have a guarantee from an opco, an event of default at the holdco may not affect the opco. First, if there is secured debt, can you determine what assets are being used as collateral. This again would effect recovery in a bankruptcy. Two, can you determine the covenants of the secured debt. Covenants play a huge role in HY analysis. A cyclical company may appear to be ready to take off but a tightening debt covenant may put the company in default. Typical convenants are Debt/EBITDA, Secured Debt/EBITDA, EBITDA/interest. Some have borrowing bases which reduce a RC borrowing if assets are impaired. Secured debt normally drives the bus in the cap structure in terms of covenants. Comparing secured debt ratios from company to company is useful. Next, senior and sub debt. Senior debt is structurally superior to sub debt. This is where a liquidation analysis may be useful if you are going to invest throughout the capital structure. Why invest in sub bonds which may be worthless in a meltdown if you could have the upside of equity. There may be a reason, sub bonds have the largest coupon. Finally, any other liabilities. Some look at auto OEMs on an adjusted debt basis factoring in post retirment liabilities. Leases and others can be added to leverage stats. Since being repaid is key, you want to look at upcoming maturities. Near-term maturities could send a business into default if they can’t be refinanced. Are maturities well-laddered or lumpy? Current credit conditions make refinancing difficult and could take an ok operating business and put into default. Check out Macklowe properties which was financed with ST debt and now is losing assets. Other causes for concern can be bank bridge loans which need to be taken out in typically a year or less. This should be enough to get started. Once this is done, a comparison of yields with comps and a company’s expected performance is introduced. Will spreads widen or tighten and why.
I work in HY and might be able to find some research for you if we cover the name.
does anyone have a recommenation for a good book on high yield analysis? or perhaps a pdf of a sell-side primer?
Well the name i need is Guitar Center (GTRC). Thanks! Special thanks to Accountant23, very helpful pointers I will dig into them
Good job accountant23! Buddha - you need to read that and think about it a lot. There is this huge fundamental difference that means your process needs to be changed completely. If you don’t come up with recognition of that, you just won’t get the job.
GTRC - This isn’t nearaly as obscure as I thought. This company has been private for just a few months and it was pretty big and healthy prior to that. There’s tons of info available and it’s really what the buyout did to the company that is the issue.
GTRC is pretty easy to research. It’s really all about the SSS comps (retailers have tremendous operating leverage). If SSS comps are improving or positive, it’s likely a buy. Given the macroenvironment, I wouldn’t be surprised if that’s not the case and the company has announced massive restructuring/store closing. You would naturally factor this into your model.
JoeyDVivre Wrote: ------------------------------------------------------- > Good job accountant23! > > Buddha - you need to read that and think about it > a lot. There is this huge fundamental difference > that means your process needs to be changed > completely. If you don’t come up with recognition > of that, you just won’t get the job. Yea I know, I cover Wireless Service and Comm Equip now for a couple of growth funds, Balance sheets just are not that important